PremiumSeveral consulting firms and insolvency professionals are exploring plans to set up units that specialize in running bankrupt businesses after the Insolvency and Bankruptcy Board of India proposed changes to allow entities to run insolvent companies, industry executives said
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NEW DELHI : Several consulting firms and insolvency professionals are exploring plans to set up units that specialize in running bankrupt businesses after the Insolvency and Bankruptcy Board of India (IBBI) proposed changes to allow entities to run insolvent companies, industry executives said.
The changes will allow incorporated entities to be hired by lenders to run businesses admitted for bankruptcy resolution in place of individual professionals. The move, once implemented, will see specialized firms emerging in this area, with consulting firms and insolvency professionals forming consortiums to run bankrupt companies, industry executives said.
Currently, individuals are hired to administer bankrupt businesses and guide them through restructuring by inducting new investors. IBBI had initially specified that insolvency professional entities (IPEs) could be set up, but they can only render services to the individual resolution professionals hired to run bankrupt businesses and cannot themselves be appointed to administer them. This is now set to change with the proposed rule revision.
“From the perspective of professionalism, ethics and depth of knowledge, IPEs have an edge over individual resolution professionals. Some large consultancy firms have set up IPEs. One benefit of professional services and consultancy firms getting into this area is that the IPEs set up by them will be bound by the governance standards of their affiliate or parent entity. Allowing IPEs to be hired as resolution professionals is a step in the right direction," said Anoop Rawat, a partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas and Co.
It is time for individual insolvency professionals to get together and form IPEs as it brings together skills from different disciplines, according to Manisha Rawat, a partner at Felix Advisory, a management consultant. “When a group of people work together, the time taken for certain tasks could come down to a certain extent, and the corporate insolvency resolution process (CIRP) would be completed in a time-bound manner," Rawat said. Felix Advisory is also in the process of forming a professional insolvency entity.
However, there are areas where more clarity is needed. Currently, although individual resolution professionals can hire others to assist them and can also get support from existing management, it is the resolution professional who is responsible for the process and is held accountable. “It remains to be seen how roles will be defined, and accountability will be fixed when an IPE is hired for administering the stressed business during the bankruptcy," Rawat said. Besides, the cost of insolvency resolution will also go up, which will be an additional burden on the committee of creditors or the corporate debtor, Rawat explained.
A key consideration for policymakers is that rescuing a bankrupt business is done flawlessly without controversies as it is a highly litigation-prone process with competing interests of different stakeholders.
Rajiv Chandak, a partner at Deloitte India, said allowing entities to take insolvency cases will let lenders hire firms with appropriate skill sets and resources for complex cases. “Committees of creditors prefer to appoint firms over individuals, and this regulation will empower such committees," Chandak said.